Corn-Crop Stunner for Morgan Stanley Means U.S. is Overestimating Supply

By Whitney McFerron and Jeff Wilson -
Jul 8, 2011

U.S. corn supplies may be smaller
than expected this year, according to analysts including Morgan
Stanley’s Hussein Allidina who were surprised by a government
forecast for the second-highest planted acreage since 1944.

The U.S. Department of Agriculture raised its estimate on
June 30 to 92.282 million acres, after all 31 analysts in a
Bloomberg survey anticipated a decline because of flooding and
unusually wet weather in the Midwest. The USDA report sent corn
futures in Chicago to the lowest level this year and prompted
Goldman Sachs Group Inc. to cut its price forecast.

The USDA underestimated planting delays and the risk of
yield loss before the harvest, Allidina said. The government
plans to resurvey farmers in North Dakota, South Dakota,
Minnesota and Montana, where some areas got triple the normal
rainfall in May and June. There also are no signs that demand is
slowing for corn from the U.S., the world’s largest grower and
exporter, he said.

“The acreage number, there is little doubt in my opinion,
will be revised lower,” Allidina, Morgan Stanley’s head of
commodity research in New York, said in an interview.
“Inventories are tight. The likelihood that last week’s numbers
are correct and the likelihood that we have good weather are
very low. You still want to be long December 2011 corn.”

Corn futures for December delivery may rally to $7.50 a
bushel on the Chicago Board of Trade from yesterday’s close at
$6.155, according to Allidina. If weather problems erode yields
in July or August, prices may reach a record $8, he said.

Revised Forecast

That’s below Allidina’s forecast last month of more than
$9, partly because crude oil’s 13 percent slump since the end of
April eroded the value of corn-based ethanol, he said. Corn
futures for July delivery touched a record $7.9975 on June 10.

Commerzbank AG said yesterday that corn will average $6.80
in the second half and may top $7 if production estimates are
reduced. “Given the tight fundamental situation, we do not
expect low corn prices on a lasting basis,” the bank said in a
report.

“The acreage report was a travesty,” said Roy Huckabay,
an executive vice president for the Linn Group in Chicago.
“Questions remain as to exactly how much of the recent Midwest
flooding was captured in the acreage survey, which was conducted
in early June. Harvested acreage will be lower than the USDA
said.”

Huckabay said corn may reach $10 by July 2012 as output
drops and demand increases, reiterating his forecast from before
last week’s report.

USDA Surveys Farmers

The USDA’s National Agricultural Statistics Service
surveyed 70,000 farmers and collected 11,000 field samples from
May 28 to June 17 to make its June 30 estimate, which was an
increase from the 92.18 million acres the government forecast in
March. A Bloomberg survey on June 27 showed analysts expected a
drop to 90.629 million acres. The agency may update its estimate
on Aug. 11.

During the time of the USDA’s survey, some farmers may have
been too optimistic about what they could still plant, said Todd
Davis, a senior economist at the American Farm Bureau Federation
in Washington. Unrelenting rain in the second half of June kept
many producers out of fields until it was too late to sow crops
without risking yield losses and damage from harvest-time frost.

“Mother Nature has a major impact on final acreage,”
Davis said. “The harvested acreage is the key number that will
impact final production, with all the flooding along the
Missouri and Mississippi rivers and drought across the southern
growing region.”

Wet weather may have prevented a record 6.3 million total
crop acres from being planted this year in North Dakota, Aaron Krauter, the executive director of the state’s USDA Farm Service
Agency in Fargo, said on June 28. The agency oversees disaster
assistance programs. USDA’s NASS estimated that North Dakota
crop area would only drop by 1.572 million acres from last year.

Floods along the Missouri River in South Dakota, Iowa,
Nebraska and Missouri also may reduce the amount of crops
farmers are able to harvest, Linn Group’s Huckabay said. The
USDA currently estimates farmers will collect grain from 84.888
million acres this year. Total U.S. corn production is expected
to be 13.2 billion bushels, the most ever.

“I doubt the corn crop will top 13 billion bushels,”
which means smaller inventories next year as demand improves, he
said.

Inventory Outlook

The USDA said June 9 that corn inventories before next
year’s harvest may drop to 695 million bushels, the least since
1996. If the USDA’s more-recent acreage forecast is correct, as
well as its estimate for average yields at 158.7 bushels an
acre, stockpiles may actually jump to 1.2 billion bushels, said
Chad Hart, an agricultural economist at Iowa State University.

Hot, dry Midwest weather in the next two months may erode
yields and prevent a record harvest, Hart said. Crops also are
more susceptible to frost this year, since many fields were
planted later than normal, he said.

“If all this acreage makes it to harvest, then producers
have a whale of a crop coming down the line,” Hart said from
Ames, Iowa. “It does help fill the supply hole we were worried
about.”

The USDA forecast that 92 percent of the planted area will
be harvested this year, the same rate as last year, when 81.446
million were harvested. The department also estimated U.S.
stockpiles on June 1 were 3.67 billion bushels, 12 percent
higher than anticipated in the Bloomberg survey. That implies a
44 percent drop in feed use in the three months ended May 31,
according to Allidina.

Goldman Cuts Forecast

Goldman Sachs analysts Damien Courvalin and Allison Nathan,
in a report, slashed their price outlook on July 1, calling for
$5.90 in the next three months, compared with $8 previously,
because of the expectation for larger supplies.

Corn yields may be lower than the government expects, as
excess moisture has sapped nutrients from fields in the eastern
Midwest, while dry soil hurts crops from North Carolina to
Texas, said Michael Cordonnier, the president of the Soybean and
Corn Advisor in Hinsdale, Illinois. Cordonnier, who toured corn
fields in Ohio, Indiana and Illinois last week, said yields will
fall to 157 bushels an acre and may reach 150 bushels if hot,
dry weather expands.

A corn rally may depend on demand that has improved after
prices fell in the past month. China, the world’s largest
consumer after the U.S., became a net importer last year for the
first time since 1996. The USDA yesterday said China purchased
540,000 metric tons from U.S. exporters. South Korea and Egypt
also have boosted purchases since prices fell.

More Feed Demand

U.S. livestock producers didn’t cut back their herds even
when feed costs were rising, Morgan Stanley’s Allidina said.

The number of cattle on feedlots totaled 10.928 million
head on June 1, up 4.1 percent from a year earlier, the USDA
said last month. The number of hogs to be sold for slaughter on
June 1 was 59.197 million, up 0.6 percent from 58.862 million a
year earlier, the agency said on June 24. JBS SA (JBSS3), the world’s
biggest beef producer, is betting on a rebound in U.S. meat
exports because of the weak dollar, Chief Executive Officer
Wesley Batista said yesterday.

Ethanol producers may use a record 5.05 billion bushels of
corn next year, or 38 percent of the U.S. crop and topping
demand for livestock feed for the first time ever, the USDA
estimates.

“The price has to move to ration demand,” Allidina said.
“We’re not rationing demand today, and that concerns me, given
the amount of demand we have.”